Banks wary of property titles as collaterals for loan facilities

The recent urban development activities in the two major cities by the government have continued to trigger reactions among banks and real estate professionals, as financial institutions tighten their lending rules for the sector, writes Chinedum Uwaegbulam

These are not the best of times for property developers and prospective homeowners as financial institutions, especially commercial and mortgage banks are rejecting property documents for loan transactions.

The Guardian gathered the development arose due to the spate of land grabbing and demolitions in Abuja and Lagos, which affected some estate and private developments being financed by some banks. Recently, Lagos agencies demolished several structures in Ikoyi, Banana Island, and Central Lagos.

Also, the Federal Housing Authority (FHA) started pulling down 677 houses in Festac Town, Awumo-Odofin area and another 744 homes will be demolished partially due to developers’ infringement, while many other developments are on the state’s radar within the metropolis.

Besides, the lack of mortgage foreclosure law that protects investments in the housing and mortgage sub-sector, which streamlines and eases the process of mortgage transactions have made banks wary of real estate projects. Currently, only four states, namely Lagos, Kaduna, Nasarawa and Ekiti have enacted the law, while the other 32 states are yet to domesticate the law, which would de-risk banks and mortgage firms.

Currently, Nigeria is ranked 131 out of 190 economies in the world on ease of doing business, according to the latest World Bank yearly ratings. The ratings rank countries based on how the regulatory environment is conducive to business operation through simpler and friendlier regulations for businesses, and stronger protections of property rights by governments, among other key variables.

Specifically, estate surveyors and valuers anticipate more stringent measures from banks to protect their loans. A Professor of Estate Management, University of Lagos, Austin Otegbelu, told The Guardian that the recent happenings in Abuja and Lagos are quite unfortunate and have introduced extra risk on real estate as an investment.

“It also places an extra responsibility on investors and private developers to be more diligent when investing in real estate. I know that banks are likely going to introduce more stringent conditions for customers seeking loans.

“No bank would like to collect customers’ money from the front door and allow it to disappear from the rear door. The situation is worse if some of the developers had valid titles and got approval from relevant agencies of government before commencing development as some of those affected claimed.

“It’s really an unfortunate situation because relevant government agencies are supposed to be monitoring illegal developments periodically.”

According to him, there’s a need for more public enlightenment to avoid such massive destruction of properties in a country experiencing housing famine and economic challenges. “When agencies of government are negligent in their duties, the government should accept responsibility and not pass the fault to the citizens.

“There is a need for the various governments to be more sensitive in matters relating to citizens’ investments, particularly in this period of economic downturn. This is not to say that I encourage illegal development,” Otegbelu said.

Chairman, Nigerian Institution of Estate Surveyors and Valuers (NIESV) Lagos branch, Gbenga Ismail, said: “Obviously, right now lenders will be very concerned at the current demolition or corrective measures being taken by the state government. However, this cannot affect collateral lending as the title if legitimate will always remain in most cases.

“However, where buildings of any sort cannot be permitted then it means ownership will not be transmitted. So, where you have documentation where title cannot be allotted by the government then such cannot be used as collateral. That’s why banks should be more cautious with some of the new developments. They are not justified; insurance is there for a reason.”

Ismail said the government needs to follow its own rules and also engage relevant professionals to increase capacity.

“A lot of the default comes as a result of system failure from within, which manifests eventually in demolition or collapse,” he added.

The Chairman, Association of Capital Market Valuers (ACMV), Chudi Ubosi, doesn’t believe that the demolitions have made any impact on the acceptance of real estate documents as collateral. “It’s too early as we may eventually find out many of these properties demolished may not necessarily have valid title documents and relevant approved plans.

However, he said: “The banks are very justified in tightening their rules for lending against real estate, as a lot of Nigerians and businessmen who many times obtain loans, default and make it impossible for the financial institutions to realise their assets or recoup their monies.

“There are of course genuine cases but more often than not, the frustrations are real. There are many tricks employed by loan seekers using real estate that have made the banks become cautious and tighten their rules.

“Many banks have had their fingers burnt after the property owners have proceeded to tie them up in various courts with litigation and come up with all manner of delay tactics to frustrate the sales of these assets. This is even when the banks have gone through the process of perfecting the mortgage transaction with the government authorities.”

He said many banks are now cautious and undertake extensive due diligence in transactions that involve using real estate collateral for facilities.

Ubosi, who is the Principal Partner, Ubosi Eleh and Company, wants the government to make it easy for people to obey the law by reducing the cost of obtaining approvals as it is outrageous and virtually comes through as punitive.

“The process of obtaining building approval should be simplified as much as possible. The volume of documentation required is unnecessary.

“Government cannot oversee all ongoing developments. They don’t have the resources. Supervision and oversight can be farmed out to professionals whose licences and professional integrity will be at stake if they are found wanting.

“There must be a means of holding persons responsible and accountable. It’s not enough to destroy people’s homes and investments because they built homes on the drainage channels. That’s the easy part. But before those developments went up, there was a whole chain of people and events involved.

“So, who sold the land to the developers? Who allowed them to develop knowing that the development was on the drainage channels or that the sites were not approved for development? Which government officials turned a blind eye or were compromised in the process? Who are the developers? This chain of persons involved must all be brought to book and sanctioned,” he said.

Ubosi urged the government to continually expand and provide infrastructure for the cities to expand faster, “People build on drainage channels because everyone wants to live within the city. Living within the city guarantees basic infrastructure and services such as roads and security. But the provision of infrastructure for new layouts must be a priority so that people are encouraged to spread out and move to new places, as well as save themselves the chances of falling prey to fraudulent developers.”

The Managing Director and Chief Executive Officer, NISH Affordable Housing Ltd, Dr. Yemi Adelakun, who also urged governments to ease processes for obtaining land titles, and building approvals, called for monitoring and supervision of building development to ensure remedial actions to avert huge losses not only to developers but to the economy as a whole. “Other penalties beside demolition should be explored,” he said.

These are not the best of times for property developers and prospective homeowners as financial institutions, especially commercial and mortgage banks are rejecting property documents for loan transactions.
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